Auto 401(k) Enrollment Not Widespread: Impact of Savers Society' Campaign Questioned
June 5, 2006
It may be a while before mutual funds feel the impact of the "Savers Society" campaign, a recently launched effort by two former vice presidential nominees to encourage companies to offer automatic 401(k) enrollment.
While studies show that automatic enrollment significantly boosts both participation and savings rates, many companies still are concerned about the added expense of employing it, not to mention the risk of a lawsuit by an employee whose investment declines under such a plan, said Ed Ferrigno, vice president of Washington affairs at the Profit Sharing/401(k) Council of America.
Ferrigno, whose organization represents employers offering defined contribution plans, cites yet another concern: Thirty states still have wage garnishment laws, prohibiting money from being taken out of an employee's pay without the individual's express written consent.
"Those laws on the face forbid auto enrollment - even though they're probably already preempted by ERISA [the Employee Retirement Income Security Act] and we're not aware of a single case of any enforcement action under the law," Ferrigno said.
The Savers Society campaign, to inspire automatic plan enrollment, is the brainchild of former Democratic vice presidential nominee John Edwards and former Republican vice presidential nominee Jack Kemp. They launched it last month in conjunction with the Retirement Security Project of Washington, a group dedicated to improving the retirement income prospects of Americans and supported by The Pew Charitable Trusts, Georgetown University's Public Policy Institute and The Brookings Institution.
Unveiled at a Pentagon City, Va., branch of Costco Wholesale, the campaign is based on the premise that automatic enrollment can increase financial security for middle- and lower-income families. Under automatic enrollment, a company's new employees are enrolled in a company defined contribution plan unless they opt out. That's the reverse of the way most plans operate.
Currently, according to the Retirement Security Project, automatic 401(k) plan participation boosts the rate of plan participation from an average of about 75% to between 85% and 95%. In the 18 months since implementing automatic enrollment, Costco increased participation in its 401(k) plan from 68,000 employees to 77,000 employees.
Among new hires, according to the Retirement Security Project, automatic enrollment generally boosts plan participation by women from 35% to 86%, Hispanic participation from 19% to 75% and persons earning under $20,000 annually from 13% to 80%.
Through the Savers Society campaign, the non-partisan Retirement Security Project aims to double the number of people enrolled through automatic 401(k) plans by year-end.
But the campaign, said Stephanie O'Keefe, deputy director of the Retirement Security Project, may be limited. It consists largely of Kemp and Edwards "personally" reaching out to corporate executives and corporate board members.
It definitely won't hurt, Ferrigno commented, "but I don't see too many CEOs making decisions based on a phone call from politicians. The principals involved with that program [the Retirement Security Project] haven't been particularly helpful in crafting employer-friendly legislation in this area or others."
As of 2004, Ferrigno said, 10.5% of companies, up from 8.4% in 2003, had automatic 401(k) plan enrollment. About half of the companies selected a conservative investment as the default investment. Of those that offered automatic enrollment, 27% defaulted to stable value funds, 23% to money market funds, 30% to balanced funds, 6% to professionally managed accounts, and the remaining 14% to a lifestyle or target fund, or some variation, he said.
Ferrigno said the Savers Society campaign is only one of at least three factors expected to help accelerate automatic defined contribution plan enrollment. The others include the pending so-called pension reform bill. House Bill 2830 and Senate Bill 1783, currently in committee, are expected by most to ultimately be approved by President George Bush. Both bills include provisions encouraging automatic 401(k) enrollment. The third factor is pending guidelines by the Department of Labor's Employee Benefits Security Administration (EBSA). These could come as early as June, and should bode well for mutual funds.
"With the move toward automatic enrollment, the choice of a default fund becomes critically important because many employees will be placed in the fund and are likely to leave their assets in the default," said Ann L. Combs, EBSA assistant secretary. "A money market fund is not a good long-term investment for a retirement plan. We are considering allowing employers to use more appropriate investment alternatives, such as lifecycle or target-age funds, balanced funds or professionally managed accounts as defaults."
Regardless of the outcome of pending legislation, EBSA is expected to expand an employer's current safe harbor fiduciary protection in defined contribution plans to include an automatic enrollment plan's default provision.
"To the degree that there are default investments, the Department of Labor action and proposed legislation will significantly redirect default investments out of conservative investments into more diversified investments," Ferrigno said. "How this will increase the curve toward automatic enrollment is another thing. It's certainly going to help, but you're not going to have overnight 90% enrollment."
All these efforts toward automatic 401(k) plan enrollment provide guidance, smooth the waters and generally remove perceived barriers to automatic plan enrollment by companies, Ferrigno said.
However, amid a hungry plaintiff bar, all this support may not be quite enough. Also, he noted, the Department of Labor guidelines are not expected to address employer concerns over state wage garnishment rules.
As of year-end 2005, mutual fund assets represented $1.24 trillion of $2.44 trillion in 401(k) plans, according to the Investment Company Institute.
"We support it because it's good public policy," said ICI spokesman Chris Wloszczyna, of pending legislation that would encourage automatic 401(k) plan enrollment. "It could or could not mean more for mutual funds. The main objective is to make sure people save for their retirement."
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